Amazon’s big spending on digital, logistics delivers loss

Amazon.com reported a surprise net loss as the world’s largest online retailer continued to pump money into warehouses and digital content, fueling sales growth at the expense of profits.

The second-quarter net loss was $7 million, or 2 cents a share, compared with profit of $7 million, or 1 cent, a year earlier, the Seattle-based company said Thursday.

Analysts had projected net income of $28.8 million on average, or 6 cents, according to data compiled by Bloomberg.

Chief Executive Jeff Bezos is betting that near-term investments on cloud computing and a massive delivery infrastructure that lets the company send packages anywhere in the country in two days will provide cash flow down the line.

Operating expenses rose 23 percent in the quarter, as Amazon built out its digital media business, which delivers books, music and shows to its Kindle devices.

“The clock is ticking for Amazon to show that it can sell its goods and services while making a profit that might start to justify its market capitalization,” said Colin Gillis, an analyst at BGC Partners in New York who rates the shares hold.

Amazon, which began as an online seller of physical books in 1995, now sells everything from apples to treadmills to millions of customers.

It’s also used its Prime membership service to boost loyalty. Members of the program, which ships packages in two days, spend three to four times more than nonmembers, according to Colin Sebastian, an analyst at Robert Baird & Co.

The company is seeing more Prime members signing on to access TV shows and movies, Szkutak said. Spending on technology and content increased 47 percent, the most of any category, primarily from investments in Amazon Web Services, the company’s cloud-computing business and video content, he said.

Sales of digital products are increasing faster than physical items, Szkutak said. Amazon is already making investments for the fourth-quarter holiday shopping season and “revving up video content,” he said.

The company has spent money on getting warehouses closer to customers, something that should reduce shipping costs over time. Shipping as a percentage of revenue was 4.6 percent, the same as the previous year, showing the effort isn’t yet at a scale that is adding to profit. Fulfillment expenses increased 36 percent.

“We’re investing very heavily into the business,” Chief Financial Officer Tom Szkutak said in a conference call. “We’re continuing to add capacity. We’re investing for the large opportunities we have in front of us.”

The investments mean Amazon’s margins have continued to contract. Operating margin narrowed to 0.5 percent from 0.8 percent a year prior. That metric in North America, the company’s most mature market, contracted to 4.3 percent in the second quarter from 4.7 percent a year earlier.

While the online retailer ended 2012 with a loss of $39 million, investors have rewarded Bezos’ investment strategy with one of the highest valuations among the company’s peers. Amazon stock is trading at 55 times next year’s earnings, compared with a price-earnings ratio of 16 for eBay, according to data compiled by Bloomberg.

While the euro increased 1.48 percent against the dollar in the second quarter, a benefit to Amazon, the Japanese yen declined 4.96 percent.

About 13 percent of Amazon’s international sales came from Japan in 2012, and in March, the company started selling its 8.9-inch Kindle Fire tablet in the country.

Sales by third parties on the site, which bring in higher margins, made up 40 percent of items sold — the same percentage as the second quarter last year.

The company takes a commission that’s logged almost entirely as profit when consumers purchase from an outside seller, helping Amazon buffer margin contraction.

Other local earnings reports

• Alaska Air Group
reported second-quarter profit of $104 million, or $1.47 a share, up 58 percent from the Seattle-based airline company’s earnings of $68 million, or $0.93 a share, a year ago. But the increase fell short of what analysts had forecast, and the

stock lost 79 cents, or 1.3 percent, to close at $60.37.

Alaska also reported a 3 percent rise in quarterly revenue from a year ago, to $1.3 billion.

“Although our quarterly results (excluding special items) were down slightly, our financial performance continues to be very strong,” CEO Brad Tilden said in a statement. He also noted that Alaska recently initiated a quarterly cash dividend of 20 cents a share to be paid out Aug. 22.

Alaska expects to add seven more aircraft to its 176-plane fleet before the end of the year. It projected an approximate 8 percent increase in capacity and a roughly 4.5 percent increase in costs due to the new planes.

Sales and marketing expenses soared 33 percent to $590.5 million. Technology and content costs rose 21 percent, to $140.7 million, as more people were hired for key projects.

“We knew we were facing second-quarter headwinds, and those which we expected, as well as some we didn’t, materialized,” CEO Dara Khosrowshahi said. “Despite this, we remain confident about our long-term strategy.”

The Associated Press

• Outerwall
, the owner of Redbox DVD rental machines, said second-quarter profit jumped 27 percent to $46.9 million, or $1.64 a share, after it recorded gains from an accounting change and the sale of some kiosks.

The weak video rentals pushed the stock of the Bellevue company, which used to be known as Coinstar, down $5.80, or 8.9 percent, to $59.50 in after-hours trading Thursday.

Profit was boosted by gains of $1.09 a share on the sale of some kiosks acquired last year from NCR and a change in accounting for DVD inventory costs.

“We’ve been able to increase our overall customer base with Redbox, and I think that bodes well for the future,” said J. Scott Di Valerio, Outerwall’s CEO. “We’re looking at a solid back-half of 2013.”